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GROSS DOMESTIC
PRODUCT (GDP)
WHAT IS GDP?
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Just as economists study the amount of
goods and services that single producers
bring to the market, they also study the total
amount of G & S the economy as a whole
produces.
They use national income accounting, a
system of statistics and accounts that keeps
track of production, consumption, saving, and
investment in the entire economy
The statistics and accounts are used to
measure how the economy is doing and trace
long-term trends
DEFINITION
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The dollar amount of all final goods and
services produced within a country’s
national borders in a year
The single most important measure of
overall economic performance
The most comprehensive statistics kept
concerning the economy’s performance
Importance of GDP Analysis
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Although there are components that are
not included the measure is still reliable
When interpreted properly GDP
becomes a useful tool in economic
understanding
It is generally regarded as a
measurement of both he economy’s
performance and its general health
Importance of GDP Analysis

It allows us to:
 Determine how we are doing and where
we are going
 Make political decisions
 Helps government decide what should
be done
 Increase
taxes?
 Lower interest rates?
HOW DO WE MEASURE?
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All final goods and service produced
in one year multiplied by their prices
gives you the dollar value of
production
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(Figure 13.1 on page 342)
HOW DO WE MEASURE?
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Since measuring every single product
would be difficult, sampling is used for
both quantity and prices of goods sold
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Similar to Standard and Poor 500 or Dow
Jones
Figures become less accurate but they are
reliable
With a Partner
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Describe the 4 factors that are not taken
into consideration when measuring GDP
What limitations or weaknesses exist
when examining the GDP?
Answer question # 1 on the back of the
initial hand-out
WHAT IS NOT INCLUDED?
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Intermediate products – products used in
making other products already counted in
GDP
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only if something is purchased for final use by
the consumer would it be counted
replacement tires would be included but tires
that come with a new car would not be
counted, they’re already in the price of the car
WHAT IS NOT INCLUDED?

Secondhand sales – sales of used
goods
 the original sale of the good was
included, the second time its not
 If I buy a new Nintendo 64 on opening
day it counts toward GDP, but not
when I resell it on E-Bay
WHAT IS NOT INCLUDED?
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Products produced by American
companies abroad
 If a foreign-owned company produces
products in the US, they are counted in
GDP (BMW)
 Only products produced within the
borders of the US are counted
(McDonalds)
WHAT IS NOT INCLUDED?
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Non-market activities- Activities that do
not take place in the market
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The services performed by a homemaker
are not counted
 Mowing Lawn or general home
maintenance
Illegal activities (underground economy)
 Gambling, smuggling, prostitution,
drugs, etc. is a billion dollar industry but
this is not reported so it is not included in
GDP
LIMITATIONS
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Delays in reporting statistics, and then
adjustments that occur after
Do not take into account other factors
influencing individual happiness
 Environment, free time, health, job
satisfaction, etc.
LIMITATIONS

GDP went up $10 billion due to purchases of
nerve gas
 Is this a good thing?
 Quality of life issues not factored in
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GDP increased because 10,000 new homes
were built, but what if they were built after
previous homes were destroyed by a hurricane